Tax Type
Retail Sales and Use Tax
Description
Manufacturer of medical diagnostic equipment /testing kits; leased/rented equipment
Topic
Accounting Periods and Methods
Assessment
Date Issued
10-06-2004
October 6, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ********:
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period November 1999 through October 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a manufacturer of medical diagnostic equipment and testing kits ("Reagents") that are used with the equipment. The Taxpayer sells and leases the medical equipment and sells the Reagents. The Taxpayer uses traditional lease agreements to lease some of the medical equipment to customers. The Taxpayer also enters into contracts known as Reagent Agreements (the "Agreement") with its customers. Under the terms of the Agreement, customers are required to purchase a minimum number of Reagents at a set price over a predetermined period of time. The medical diagnostic equipment used with the Reagents is provided to customers as part of the Agreement.
The Department audited the Taxpayer and assessed use tax on the medical equipment provided to customers under the Agreement. The Department treated the provision of this equipment to customers as a taxable withdrawal from inventory and assessed use tax on the cost of the medical equipment. The Taxpayer maintains that the cost of the Reagents includes a lease charge for the use of the medical equipment. In cases where a customer does not purchase the minimum number of test kits required under the Agreement, the Taxpayer bills the customer an additional charge to recover the cost of the equipment lease. The Taxpayer has provided copies of invoices showing this charge and the sales tax billed on the charge.
DETERMINATION
Virginia Code § 58.1-623 C states, "If a taxpayer who gives a certificate [of exemption] . . . makes any use of the property other than an exempt use or retention, demonstration, or display while holding the property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service is first used by him . . . ."
The Agreement used by the Taxpayer clearly shows that the medical equipment is provided to customers. The Agreement makes reference to the equipment in several sections. The Agreement does not, however, contain language stating that the equipment is being leased or rented to the Taxpayer's customers.
Public Document (P.D.) 92-107 (6/24/92) addresses a case in which a taxpayer sold chemicals and provided specialized equipment for use with the chemicals to customers. The taxpayer maintained that the price of the chemicals included a rental charge for the use of the equipment. The Department ruled that the taxpayer must provide evidence that the charge for equipment rental was included in bids made by the taxpayer to sell the chemicals. Absent evidence showing that a separate charge for the lease of the equipment was billed to customers, the equipment was deemed to be a taxable withdrawal from inventory.
In P.D. 93-84 (3/26/93), the Department ruled that a coffee and beverage service business was required to demonstrate that its beverage service agreement constituted a valid lease agreement. This ruling stated that the beverage service agreement must contain separate lease provisions specifically for the lease of coffee and beverage equipment and must state the terms and conditions for the lease. Alternatively, the taxpayer could execute a separate lease agreement for the equipment. Any lease agreement or terms must contain a separately stated amount for the leased equipment and invoices to customers must contain a separate lease charge. Otherwise, beverage equipment provided to customers would be taxable regardless that a "built-in" charge for the equipment is included in the price of the coffee and beverages sold under the beverage service agreement.
In the present case, the Taxpayer has not shown that a separate lease agreement existed for the equipment that is provided to customers under the Agreement. The Agreement clearly does not contain its own separate language for the lease of the medical diagnostic equipment. Based on the policy established by the Department in the public documents cited above, the audit assessment is correct.
Conclusion
The Department's records indicate that the assessment has a current outstanding balance of *****. The Taxpayer should pay this amount within 30 days from the date of this letter and avoid the accrual of additional interest and an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. Payment should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P. O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****.
The Code of Virginia section and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions concerning this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/48993S
Rulings of the Tax Commissioner